Question
In: Finance
Why does times-interest-earned use operating income, but the return on equity uses net income instead of...
Why does times-interest-earned use operating income, but the return on equity uses net income instead of operating income?
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Expert Solution
The times interest earned (TIE) ratio is a measure of a company's ability to meet its debt obligations based on its current income. The formula for a company's TIE number is earnings before interest and taxes (EBIT) divided by the total interest payable on bonds and other debt.The result is a number that shows how many times a company could cover its interest charges with its pretax earnings.A company's capitalization is the amount of money it has raised by issuing stock or debt, and those choices impact its TIE ratio. Businesses consider the cost of capital for stock and debt and use that cost to make decisions.
So while calculating the ability of a firm to repay the interest from the profit earned from the business is to be calculated from the real operating profit without deducting interest.
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of how effectively management is using a company’s assets to create profits.
ROE uses Net income for calculation because it required to calculated the distributable profits to the shareholders after deducting all the expenses attributable.
jeff jeffy answered 2 years agoRelated Solutions
Ratio of Liabilities to Stockholders' Equity and Number of Times Interest Earned The following data were...
Ratio of Liabilities to Stockholders' Equity and Number of Times
Interest Earned
The following data were taken from the financial statements of
Hunter Inc. for December 31 of two recent years:
Current Year
Previous Year
Accounts payable
$982,000
$229,000
Current maturities of serial bonds payable
580,000
580,000
Serial bonds payable, 10%
2,310,000
2,890,000
Common stock, $1 par value
100,000
120,000
Paid-in capital in excess of par
1,060,000
1,070,000
Retained earnings
3,680,000
2,920,000
The income before income tax was $809,200 and...
Ratio of Liabilities to Stockholders' Equity and Times Interest Earned Hasbro, Inc. and Mattel, Inc., are...
Ratio of Liabilities to Stockholders' Equity and Times Interest
Earned
Hasbro, Inc. and Mattel, Inc., are the two largest toy companies
in North America. Condensed liabilities and stockholders' equity
from a recent balance sheet are shown for each company as follows
(in thousands):
Hasbro
Mattel
Liabilities:
Current liabilities
$2,742,000
$4,818,000
Long-term debt
1,476,000
1,912,000
Other liabilities
_
918,000
Total liabilities
$4,218,000
$7,648,000
Shareholders' equity:
Common stock
$191,000
$860,000
Additional paid in capital
591,000
3,155,000
Retained earnings
3,675,000
3,251,000
Accumulated other...
Times-Interest-Earned Ratio EVANS and Sons, Inc. Income Statement (in millions) 2019 2018 Net sales $9,800 $9,300...
Times-Interest-Earned Ratio
EVANS and Sons, Inc.
Income Statement
(in millions)
2019
2018
Net sales
$9,800
$9,300
Cost of goods sold
(5,500)
(5,200)
Gross profit
4,300
4,100
Selling and administrative expenses
(2,800)
(2,700)
Income from operations
1,500
1,400
Interest expense
(300)
(250)
Income before income taxes
1,200
1,150
Income tax expense
(220)
(200)
Net income
$980
$950
EVANS and Sons, Inc.
Balance Sheet
(in millions)
2019
2018
Assets
Current assets
Cash and cash equivalents
$100
$300
Accounts receivable
900
800
Inventory...
Times-Interest-Earned Ration Calculated the times-interest-earned ratio for Smith & Sons Inc for 2015 and 2016 and...
Times-Interest-Earned
Ration
Calculated the
times-interest-earned ratio for Smith & Sons Inc for 2015 and
2016 and comment on the company’s ability to pay its current
interest payments. Did the company’s ability to pay its current
interest changes improve?
Time interest earned ration =
Income before interest expense and income taxes/Interest
expense
Smith & Sons, Inc
Balance Sheet
Decemober 31, 2016 and
2015
(In millions)
2016
2015
Net sales
10,000
9,500
Cost of goods sold
(5,500)
(5,200)...
Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from...
Ratio of Liabilities to Stockholders' Equity and Times Interest
Earned
The following data were taken from the financial statements of
Hunter Inc. for December 31 of two recent years:
Current
YearPrevious
Year
Accounts payable$622,000 $168,000
Current maturities of serial bonds payable380,000 380,000
Serial bonds payable, 10%1,560,000 1,940,000
Common stock, $1 par value70,000 90,000
Paid-in capital in excess of par810,000 810,000
Retained earnings2,780,000 2,210,000
The income before income tax expense was $814,800 and $713,000
for the current and previous years, respectively....
Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from...
Ratio of Liabilities
to Stockholders' Equity and Times Interest Earned
The following data
were taken from the financial statements of Hunter Inc. for
December 31 of two recent years:
Current Year
Previous Year
Accounts payable
$744,000
$198,000
Current maturities of serial bonds payable
460,000
460,000
Serial bonds payable, 10%
1,890,000
2,350,000
Common stock, $1 par value
90,000
110,000
Paid-in capital in excess of par
970,000
980,000
Retained earnings
3,360,000
2,670,000
The income before
income tax was $564,000 and $493,500 for...
Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from...
Ratio of Liabilities to Stockholders' Equity and Times Interest
Earned
The following data were taken from the financial statements of
Hunter Inc. for December 31 of two recent years:
Current Year
Previous Year
Accounts payable
$260,000
$224,000
Current maturities of serial bonds payable
340,000
340,000
Serial bonds payable, 10%
1,680,000
2,020,000
Common stock, $1 par value
70,000
100,000
Paid-in capital in excess of par
840,000
840,000
Retained earnings
2,890,000
2,290,000
The income before income tax was $666,600 and $583,300 for...
Debt ratio, Ratio of Liabilities to Stockholders' Equity, and Times Interest Earned Camper Company and McSead,...
Debt ratio, Ratio of Liabilities to Stockholders' Equity, and
Times Interest Earned
Camper Company and McSead, Inc., are the two largest toy
companies. Condensed liabilities and stockholders' equity from a
recent balance sheet are shown for each company as follows:
Camper
McSead
Current liabilities
$1,477,000
$3,246,000
Long-term debt
795,800
1,906,000
Total liabilities
$2,272,800
$5,152,000
Total stockholders' equity
3,788,000
6,440,000
Total liabilities and stockholders' equity
$6,060,800
$11,592,000
The income from operations and interest expense from the income
statement for both companies...
Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from...
Ratio of Liabilities to Stockholders' Equity and Times Interest
Earned
The following data were taken from the financial statements of
Hunter Inc. for December 31 of two recent years:
Current Year
Previous Year
Accounts payable
$552,000
$162,000
Current maturities of serial bonds payable
370,000
370,000
Serial bonds payable, 10%
1,520,000
1,890,000
Common stock, $1 par value
80,000
100,000
Paid-in capital in excess of par
900,000
900,000
Retained earnings
3,090,000
2,460,000
The income before income tax was $529,200 and $463,100 for...
Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from...
Ratio of Liabilities to Stockholders' Equity and Times Interest
Earned
The following data were taken from the financial statements of
Hunter Inc. for December 31 of two recent years:
Current Year
Previous Year
Accounts payable
$604,000
$290,000
Current maturities of serial bonds payable
530,000
530,000
Serial bonds payable, 10%
2,370,000
2,900,000
Common stock, $1 par value
90,000
110,000
Paid-in capital in excess of par
960,000
970,000
Retained earnings
3,330,000
2,640,000
The income before income tax was $1,044,000 and $913,500 for...
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